State Street to pay $382.4m to settle SEC claims

SEC Building

The Securities and Exchange Commission has announced that State Street Bank and Trust Company has agreed to pay $382.4m in a global settlement for misleading mutual funds and other custody clients by applying hidden markups to foreign currency exchange trades.

As part of its custody bank line of business, State Street safeguards clients’ financial assets and offers such services as indirect foreign currency exchange trading (Indirect FX) for clients to buy and sell foreign currencies as needed to settle their transactions involving foreign securities. An SEC investigation found that State Street realized substantial revenues by misleading custody clients about Indirect FX, telling some clients that it guaranteed the most competitive rates available on their foreign currency exchange trades, provided “best execution,” or charged “market rates” on the transactions. State Street instead set prices largely driven by predetermined, uniform markups and made no effort to obtain the best possible prices for these clients.

State Street has agreed to pay $167.4m in disgorgement and penalties to the SEC, a $155m penalty to the Department of Justice, and at least $60m to ERISA plan clients in an agreement with the Department of Labor.

Under the terms of the agreement, the SEC will issue its order instituting the settled administrative proceeding only after a federal court approves State Street’s proposed settlement with private plaintiffs in pending securities class action lawsuits concerning its pricing of foreign currency exchange trades. State Street has agreed to admit certain findings in the SEC’s order.

“State Street misled custody clients about how it priced their trades and tucked its hidden markups into a corner where they were unlikely to notice,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement. “Financial institutions cannot mislead their customers about their trading costs.”

Paul G. Levenson, Director of the SEC’s Boston Regional Office, added, “Mutual funds and other registered investment companies should not face overreaching by the very banks hired to safeguard their assets.”

The SEC’s order will find that State Street willfully violated Section 34(b) of the Investment Company Act of 1940 and caused violations of Section 31(a) of the Investment Company Act and Rule 31a-1(b) by providing its registered investment company custody clients with trade confirmations and monthly transaction reports that were materially misleading in light of the representations it made about how it priced foreign currency exchange transactions. State Street will be required to pay $75m in disgorgement plus $17.4m in interest to harmed clients as well as a $75m penalty.

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